Insolvent Trading - an Empirical Study

Abstract

This research report documents the findings of an empirical study of judicial findings (of superior courts in Australia) relating to the duty to prevent insolvent trading. The duty to prevent insolvent trading is the most controversial of the duties imposed upon company directors. Those who support the duty argue that it provides appropriate protection for the unsecured creditors of companies. Those who oppose the duty argue that it has the effect of making directors unduly risk adverse which can result in directors too quickly putting companies into voluntary administration or liquidation for fear of personal liability (which may have a negative financial impact on unsecured creditors). Information is provided about (a) the number of court judgments over time, (b) the verdict of courts, including the amount of compensation ordered to be paid by the defendant, (c) the type of company involved in insolvent trading (including the industry it operates in, and (d) the type of director (executive, non-executive, etc) involved in insolvent trading.

Keywords: insolvent trading, directors' duties

JEL Classification: K22